Now that Justice Gorsuch is confirmed and can take the open seat on the Supreme Court, maybe SCOTUS can move forward on the cases about whether employers can make employees waive their right to class actions in an arbitration agreement.  (Btw, here’s a nice SCOTUSblog piece on Gorsuch’s arbitration decisions.)  In the meantime, California’s high court has decided a similar arbitration issue that seems likely to be the subject of a future cert petition.  In McGill v. Citibank, issued April 6, a unanimous California Supreme Court held that consumers cannot validly waive their statutory right to injunctive relief under California law, and found that the FAA did not preempt that result.

The case involves a woman who purchased a “credit protector” plan from the credit card issuer.  She felt the credit card did not keep its end of the bargain when she lost her job.  Although she had agreed to arbitrate claims and had waived representative or class actions, she started a putative class action in California state court alleging violations of multiple California consumer statutes.  Part of the relief she sought was an injunction preventing the credit card from continuing to violate California statutes.  (The parties agreed that the arbitration waiver prohibited the consumer from obtaining injunctive relief in any forum, not just arbitration.)

Each of the statutes at issue in her lawsuit was intended to protect consumers and each authorized injunctive relief.  One of the statutes also explicitly prohibited waiver of the statutory protections.  The Consumers Legal Remedies Act (CLRA), for example, declares that “[a]ny waiver by a consumer” of the CLRA’s provisions “is contrary to public policy and shall be unenforceable and void.”

California has codified the following contractual defense: “Any one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” (Civil Code Section 3513.)  Applying that doctrine in this case, California’s high court found the waiver of public injunctive relief in the arbitration agreement invalid, as it “would seriously compromise the public purposes the statutes were intended to serve.”

Now comes the tricky part of every state court opinion in this area.  Having found the arbitration agreement invalid under state law, how will the court clear the hurdles of the FAA and Concepcion/DirecTV?  The McGill opinion took the standard path: it reasoned that because the contractual defense at issue applies to every contract, this decision withstands FAA scrutiny.  (It did not, however, cite any cases in which this defense has been applied outside the arbitration context, which I believe is the unstated requirement of DirecTV.)

Furthermore, the court found reasons to distinguish the banning of class action waivers (prohibited in Concepcion) from the banning of public injunction waivers (at issue here).  For example, it noted class actions are a procedural device, while injunctions are substantive remedies.  It also found that its ruling would not interfere with the fundamental arbitration-ness of arbitration, because the injunctive relief cases will stay in court and can be heard once individual arbitrations are concluded.

Finally, the California high court remanded to the lower court to decide whether the rest of the arbitration clause should be thrown out with the bath water.  (There was conflicting language in the agreement.)

Ah, just when I worried California arbitration decisions were becoming too staid and dull…


Two federal circuit courts of appeals have recently found that documents Samsung included in boxes with consumer products did not effectively create an arbitration agreement.   In both cases, the documents had titles indicating they related to safety and warranty information, and therefore were ruled insufficient to put consumers on notice of any obligation to arbitrate.

In Noble v. Samsung Electronics America, Inc., 2017 WL 838269 (3d Cir. March 3, 2017), the putative class action complained that the battery life of the Samsung Galaxy Gear S Smartwatch was significantly less than advertised.  In response, Samsung moved to compel individual arbitration with the class representative and to dismiss the class action.  Samsung relied on an arbitration clause, including a class waiver, contained on pages 97-102 of a “Health and Safety and Warranty Guide” that was packaged in the box with the watch.  The district court denied the motion to compel and the Third Circuit affirmed.  Critically, the appellate court found that under New Jersey state law, there had been no meeting of the minds with respect to arbitration, because the Warranty Guide “did not appear to be a bilateral contract, and the terms were buried in a manner that gave no hint to a consumer that an arbitration provision was within.”  The court distinguished this case from enforceable shrink-wrap or click-wrap agreements by saying those agreements clearly inform consumers that they contain contractual terms.

Just a few weeks earlier, the Ninth Circuit had reached a similar result with regard to Samsung’s ability to compel arbitration of class claims about its phones.  In Norcia v. Samsung Telecommunications America, LLC, 2017 WL 218027 (9th Cir. Jan. 19, 2017), the putative class complained of misrepresentations regarding the Galaxy S4 phone.  Samsung moved to compel arbitration.  The district court denied the motion, and the Ninth Circuit affirmed.  Mr. Norcia’s receipt from the Verizon Wireless store stated “I am agreeing to …settlement of disputes by arbitration and other means instead of jury trials and other important terms in the Customer Agreement.”  But the Customer Agreement only mentioned Verizon Wireless, so Samsung could not avail itself of that language.  Inside the phone’s box was a 101-page brochure called “Product Safety & Warranty Information,” which included a statement that “all disputes with Samsung arising in any way from this limited warranty or the sale, condition or performance of the products shall be resolved exclusively through final and binding arbitration.”

Applying California contract law, the court found that the consumer did not express any consent to the terms in the Warranty brochure.  And, while silence can in some instances be treated as consent to a contract, the court noted that is not true when the silent person did not reasonably know there was an offer on the table.  The Ninth Circuit also distinguished shrink-wrap and click-wrap cases, by saying the outside of the Galaxy S4 box “did not notify the consumer that opening the box would be considered agreement to the terms” in the brochure and finding that in this instance the customers did not have “inquiry notice of the arbitration provision”.

The issue of whether arbitration clauses within warranty documents packaged with consumer products are enforceable is an issue in a petition for certiorari at SCOTUS right now.  In that case, the manufacturer of roofing shingles printed its warranty on the wrapper of every bundle of shingles, and the warranty included an arbitration clause.  The Missouri Court of Appeals found insufficient evidence that the consumers consented to the arbitration clause and therefore refused to enforce it.  SCOTUS appears to be holding that case in abeyance while it decides the Kindred case.

What are manufacturers of consumer products to do with these cases?  If the goods are sold by third parties, such that the manufacturer cannot get its arbitration terms on the receipt itself, the next best thing may be to put clear language on the outside of the box, informing consumers that if they open and keep the goods, they will be agreeing to the terms of X document.  If nothing else, it sounds like these brochures and guides need to be renamed.

The Ninth, Sixth, and Third Circuits all recently issued decisions about whether putative class or collective actions could proceed despite the existence of arbitration clauses.  In two of those decisions, the courts found the arbitration agreements did not allow for class arbitration and therefore dismissed the claims.  In the third, the court found the arbitration agreement was not applicable to the dispute.

In Opalinski v. Robert Half Int’l, 2017 WL 395968 (3d Cir. filed Jan. 30, 2017), the Third Circuit again tackled arbitrability issues in a case that has gotten the runaround for five years (district court, then arbitrator, then district court, then appellate court, back to district court, now back to appellate court).  The case involves a collective action complaint alleging violations of the Fair Labor Standards Act.  The arbitration clause between the employees and employer provides for AAA arbitration.  In its most recent decision, the district court dismissed the action, finding the arbitration clause did not allow class arbitration.  On appeal, the Third Circuit reiterated that courts (not arbitrators) should decide whether class arbitration is available.  It found that in this case the parties’ arbitration clause does not indicate they agreed to class arbitration.  In particular, the court found the absence of any explicit mention of class arbitration was dispositive, and outweighed the fact that the parties agreed to arbitrate disputes arising under statutes that allow class litigation.

In another employment dispute, Poublon v. C.H. Robinson Co., 2017 Wl 461099 (9th Cir. Feb. 3, 2017), a class of employees asserted that the employer had misclassified them as exempt from overtime pay and asserted a Private Attorneys General Act (PAGA) claim.  The arbitration agreement provided “neither You nor the Company may bring any Claim combined with or on behalf of any other person or entity, whether on a collective, representative, or class action basis.” It ended with a severability clause, so that if any part of the arbitration agreement was invalid, the rest of it would be enforced.  The employer moved to compel arbitration and dismiss class or representative claims.  The district court found the arbitration clause was unconscionable and denied the employer’s motion.  The Ninth Circuit reversed, finding only two aspects of the arbitration clause were unconscionable/unenforceable and those could be severed, allowing the rest of the arbitration clause to be enforced.  (The two stinkers: waiver of a representative PAGA claim (see Iskanian); and a provision allowing only the employer to go to court for injunctive or equitable relief.)

While the two classes of employees above were not able to continue prosecuting claims as a group (and had to go to arbitration), a class of consumers won the right to stay in court in Stevens-Bratton v. TruGreen, Inc., 2017 WL 108032 (6th Cir. Jan. 11, 2017).  In that case the class representative had hired a lawn care company for one year.   More than six months after the service contract had been terminated, the class representative received numerous telemarketing calls from the company, even though her number was on the Do-Not-Call Registry.  She then sued for violation of the TCPA.  In response, the lawn care company moved to compel arbitration, based on its service contract with the class representative, which “expressly waive[d] any ability to maintain any Class Action.”  The district court compelled arbitration, and the 6th Circuit reversed.  Although there is usually a presumption in favor of an arbitration agreement surviving the expiration of the rest of a contract, the court was not convinced that the dispute “had its real source in the contract.”  It found that the lawn care service contract was “irrelevant to this case,” since it had completely expired before the calls took place and the lawn services provided were not at issue in the TCPA claim.

Three state supreme courts tackled arbitration law in recent weeks: Alabama, North Carolina, and Rhode Island.  Rhode Island reversed a construction arbitration award because it disagreed with the arbitrator’s analysis.  North Carolina found that an arbitration agreement in a doctor-patient setting was unenforceable as a breach of the doctor’s fiduciary duty.  And Alabama strictly enforced an arbitral venue, even though that precluded class action.

Continuing its streak of hewing closely to the lead of federal courts on arbitration, the Supreme Court of Alabama held that plaintiffs have to arbitrate with the Better Business Bureau, even though the BBB does not conduct class action arbitration proceedings.  University Toyota & University Chevrolet Buick GMC v. Hardeman, _ So. 3d __, 2017 WL 382651 (Ala. Jan. 27, 2017).  The plaintiffs were a putative class of customers harmed by two car dealerships’ decision to stop honoring their earlier agreement to provide free oil changes.  The arbitration clause between the dealerships and purchasers called for arbitration of all disputes pursuant to the FAA, and said “either party may demand arbitration by filing with the Better Business Bureau.”  When the plaintiffs filed their demand, the BBB responded that it did not conduct class arbitrations.    The plaintiffs then withdrew their demand and filed in court, asking either to keep their fight in court or go to a forum that allowed class arbitration.  The trial court sent the plaintiffs to the AAA to decide whether class actions were available.  On appeal, the supreme court reversed in a 7-1 decision.  The majority quoted heavily from SCOTUS decisions stating that arbitration agreements should be enforced according to their terms, and found that the BBB forum was an integral part of the arbitration agreement that must be given effect.  The lone dissenter argued that, because the availability of class arbitration was for the arbitrator, it should be decided by a forum that at least retains that option.

Without any consideration of the Federal Arbitration Act, the Supreme Court of Rhode Island vacated an arbitration award.  Nappa Construction Management, LLC v. Flynn, __ A.3d __, 2017 WL 281812 (R.I. Jan. 23, 2017). (Maybe an allergy to the FAA is contagious… remember nearby New Hampshire last year?)  In a dispute between the owners of a automobile repair facility and the construction company that was hired to build it, the arbitrator issued an award that analyzed the parties’ contract and found the construction company was owed money.  The trial court refused to vacate the award, finding the arbitrator grounded his analysis in the contract and did not manifestly disregard the law.  On appeal, the Supreme Court of Rhode Island cited only cases from its own court, including labor cases, and found that the arbitrator had exceeded his authority (and the award failed to draw its essence from the agreement) by finding that the owners had effectively terminated the contract, when there was no evidence that the owners actually terminated the contract.  The court also accused the award of reaching an “irrational result.”  Two justices dissented, noting the “exceptionally deferential standard of review” for arbitration awards.  They did not, however, cite to the line from Sutter, as I would have, that even “grave error” by an arbitrator is not sufficient to vacate an award if the arbitrator in fact analyzed the contract.  (Maybe no one argued the FAA applied?  A commercial construction contract would almost certainly involve interstate commerce…)

Finally, the Supreme Court of North Carolina refused to enforce the arbitration agreement between a doctor and patient, finding that the agreement “was obtained as a result of defendants’ breach of fiduciary duty that they owed to” the patient.  King v. Bryant, __ S.E.2d __, 2017 WL 382910 (N.C. Jan. 27, 2017).  The patient had brought a medical malpractice action against his surgeon, and the surgeon tried to enforce the arbitration agreement between them.  The arbitration agreement called for application of the FAA and arbitration under health care procedures of the AAA.

The N.C. trial court refused to compel arbitration, finding the agreement was only an “agreement to agree,” and started off a crazy game of appeals court-district court ping pong involving this case.  The court of appeals reversed and remanded.  On second thought, the trial court refused to enforce the agreement because the surgeon had a fiduciary duty to disclose the arbitration agreement to his patient as a material term, and because he did not it was unenforceable.  The court of appeals affirmed, noting the application of the FAA, but finding the agreement unconscionable.  The supreme court then remanded to the trial court for further findings of fact regarding the existence of a physician-patient relationship when the agreement was signed, and the trial court complied.  Finally, the case returned to the supreme court, which held that the doctor owed a fiduciary duty to the patient and breached it “by failing to make full disclosure of the nature and import of the arbitration agreement to him at or before the time that it was presented for his signature.”  Recognizing the possibility of an argument that its holding is preempted by the FAA, the court noted “we would have reached the same result on these facts with respect to any agreement that substantially affected [the patient’s] substantive legal rights.”  However, the opinion cites no N.C. cases to support that statement, which may be fatal under the DirecTV analysis.  Two justices wrote separate dissents, based largely on FAA preemption.  (“This jiggery-pokery is precisely the type of impermissble ‘rationalization’ admonished by the United States Supreme Court. Such a tortured attempt to obviate the FAA fails.”)

What is the take away here?  It is that there is still a huge amount of variation in how a given arbitration dispute will be handled, depending on what court hears the dispute.  And the preemption rules set out in Concepcion and DirecTV are either not well understood, or are being intentionally avoided.

Just three weeks into the year and already my pile of arbitration cases is a skyscraper! So, I will cover a lot of ground in this update.

First, the headline. Kimberly, Kourtney, and Khloe Kardashian moved to compel arbitration, although they were not signatories to the arbitration agreement.  Kroma Makeup EU v. Boldface Licensing + Branding, 2017 WL 192690 (11th Cir. Jan. 18, 2017).  Despite their celebrity status, they lost in both the Florida district court and the 11th Circuit.  The problem was that the claims they wanted to arbitrate were not within the scope of the arbitration clause, because the clause was limited to “disputes arising between [the Parties]” and they were not parties.  The court had a lot of fun with the fact that the dispute was over makeup companies, writing:

“Like makeup, Florida’s doctrine of equitable estoppel can only cover so much.  It does not provide a non-signatory with a scalpel to re-sculpt what appears on the face of a contract.”

(A defendant was also unable to compel arbitration of a non-signatory class of plaintiffs in Jones v. Singing River Health Services Foundation v. KPMG, 2017 WL 65384 (5th Cir. Jan. 5, 2017).  There, the court found the plaintiff did not rely on the contract to make their claims.)

SCOTUS. On January 13, the U.S. Supreme Court agreed to wade into the issue of whether class arbitration waivers are a violation of the federal labor laws.  The National Labor Relations Board (under the Obama Administration) has repeatedly found that they are, but a split developed among the federal courts on whether the NLRB was correct.  ( You can read more about the three cases in which cert was granted at Scotusblog.  And, yes, normally SCOTUS action on arbitration would be my headline, but I couldn’t pass up a chance to see if the Kardashians led to more blog traffic…)

California’s exception that could swallow the rule. In Prima Paint, a 1967 case, SCOTUS found that a plaintiff’s claim that a contract was induced by fraud must be sent to arbitration if that contract has an arbitration clause, as long as there is no argument that that the arbitration clause itself was induced by fraud.  But this week the 9th Circuit affirmed a finding that, under California law, there was “fraud in the inception” of a contract, making it void and the arbitration provision unenforceable.  DKS, Inc. v. Corporate Business Solutions, Inc., 2017 167475 (9th Cir. Jan. 17, 2017).  If I were a plaintiff, I might just try variations on the theme, maybe a claim of “misrepresentation in the inducement”?

Florida voids arbitration agreement as against public policy.  Without any consideration of federal preemption (maybe the parties didn’t raise it?), the Supreme Court of Florida held that the arbitration agreement in a patient’s contract with her clinic was “void as against public policy” because it excluded required provisions of a Florida statute (the Medical Malpractice Act).  Hernandez v. Crespo, 2016 WL 7406537 (Fl. Dec. 22, 2016).  In particular, the court found the contract’s arbitration clause was less favorable to the patient than the statute would have been in six ways.

Alaska says suing to collect debt does not waive the right to compel arbitration in later statutory case.  Banks had litigated debt-collection actions with credit card holders and gotten default judgments.  Later, the card holders filed statutory claims against those banks and the banks moved to compel arbitration.  Applying federal waiver law, Alaska’s Supreme Court found the banks had not waived their right to arbitrate by litigating the debts.  Hudson v. Citibank, 2016 WL 7321567 (Alaska Dec. 16, 2016).

Alabama says “ripeness” is a question for the arbitrator.  In the context of litigation over a claim of indemnification that was made before the claimant had been determined liable, the Alabama Supreme Court found that the defendant’s defense of “ripeness” had to be determined in arbitration, not in court.  “As we have held that the subject matter of the dispute is clearly within the arbitration provision, any ripeness issue must be resolved by the arbitrator, not by this Court.”  FMR Corp. v. Howard, 2017 WL 127991 (Alabama Jan. 13, 2017).

As a teaser, the Tenth Circuit also issued a blockbuster opinion recently, but it deserves its own (future) post…

Echoing a holding already issued by four other circuits, the Third Circuit recently found that a defendant does not waive its right to arbitration by continuing to litigate in court, if the reason it failed to move to compel arbitration is that the motion would have been futile.  Chassen v. Fidelity Nat’l Fin., Inc., 2016 WL 4698256 (3d Cir. Sept. 8, 2016).

The case involves a class of real estate purchasers who claim they were overcharged for recording documents in New Jersey.  Although there were arbitration agreements in the relevant contracts, the defendants did not move to compel “bipolar” arbitration for two and a half years.  (Where did that term come from, Third Circuit?  Are we equating individual arbitration to a mental health condition now?)  In that time, plaintiffs served 150 non-party subpoenas and spent $50,000 on experts.

Although defendants did not attempt to explain their inaction, the Court concluded the long delay in seeking arbitration was excused.  In short, New Jersey law had nearly outlawed class action waivers in consumer arbitration clauses, so until SCOTUS decided Concepcion in 2011 (finding California’s similar rule preempted by federal law), it would not have made sense for defendants to compel arbitration.  The court reasoned that unlike in other cases of inaction, the prejudice to plaintiffs “is attributable to a change in the applicable law, not to any negligent action on the part of either party.”  It also noted that futility is a recognized exception to ripeness and administrative exhaustion, two analogous doctrines.

Other than the use of “bipolar,” none of those conclusions strikes me as odd.  But the opinion then plows some new ground.  It finds that a defendant can independently waive individual and class arbitration, because those are “substantively distinct” types of arbitration.  (And it concludes that the defendants here had a valid futility defense for both types.) Finally, the dissent points out a key piece of information: there was no class arbitration waiver in the arbitration clauses at issue.  “These clauses…do not even mention class arbitration, let alone outright prohibit it.” Which the dissent (fairly) characterizes as seriously undercutting the futility analysis.

Now that Concepcion is more than five years old, this type of case is unlikely to come up often in terms of preempted state arbitration law, but the new rules from the CFPB (and legal challenges to those regulations) could make the futility doctrine relevant again.

The 9th Circuit’s decision to enforce the arbitration agreement in Uber’s agreements with drivers made lots of news last week.  And although it includes no new principles of law, it does emphasize some principles that come up regularly in consumer and employment arbitration, so it’s worth reviewing the details.

Former drivers brought an action in federal court, alleging two primary things: that when Uber terminated them for having bad consumer credit, Uber violated statutes regulating the use of credit reports; and that Uber had misclassified them as independent contractors.  Mohamed v. Uber Technologies, Inc., __ F.3d __, 2016 WL 4651409 (9th Cir. Sept. 7, 2016).  Uber responded by moving to compel arbitration.  The district court denied the motion, finding that the delegation clauses were not “clear and unmistakable” and that the delegation clauses were unconscionable.

The appellate court disagreed on both fronts.  Critically, the operative agreements had this language in the Arbitration Provision: “Such disputes include without limitation disputes arising out of or relating to interpretation or application of this Arbitration Provision, including the enforceability, revocability or validity of the Arbitration Provision or any portion of the Arbitration Provision.”  Furthermore, the agreements mandated arbitration on an individual basis (precluding class or collective actions).  Drivers could opt out of the Arbitration Provision, but the named plaintiffs did not exercise that option.

The 9th held:

  • The delegation clause — authorizing an arbitrator to determine the validity of the Arbitration Provision — was clear and unmistakable (and therefore likely enforceable).  Although the drivers’ contracts also had venue clauses, providing that San Francisco courts had exclusive jurisdiction, the appellate court found the “conflicts are artificial.”  The venue provisions address the jurisdiction for fights over arbitration or those outside the scope of the Arbitration Provision; they don’t nullify the Arbitration Provision.  [This is an issue that comes up frequently, and the 9th Circuit addressed it head on.]
  • The delegation clause was not unconscionable.  Importantly, the ability of drivers to opt out of arbitration meant the delegation clause could not be procedurally unconscionable (a requisite aspect of unconscionability) under 9th Circuit precedent.  Nor did the requirement that drivers opt out in person or by overnight delivery make the ability to opt out illusory.  The court noted that some drivers successfully opted out.  [While not all federal circuits have addressed this issue, it provides good persuasive authority to use in favor of the conscionability of arbitration agreements with opt outs in any court.]
  • The drivers could effectively vindicate their rights in arbitration.  Plaintiffs argued they could not effectively vindicate their federal statutory rights because they had to split the costs of arbitration, which “may exceed $7,000 per day.”  However, because Uber “committed to paying the full costs,” the court did not reach that legal question.  [By agreeing to just pay the costs, Uber avoided a fight over the costs of arbitration to the drivers and probably helped its chances of winning the appeal.  This is a tactic that other litigants should consider when facing strong opposition to enforcement of an arbitration agreement.]


Continuing last week’s theme of “States Gone Wild,” here are three more oddball summer decisions from state supreme courts. All of them find interesting paths around federal case law (IMHO).

Georgia Says Class Complaint Is Deemed Arbitration Opt Out For All Class Members

In Bickerstaff v. SunTrust Bank, 2016 WL 3693778 (Ga. July 8, 2016), the issue was whether a class action challenging overdraft fees could proceed in court. The class complaint was filed in July of 2010, and in August of 2010 (in response to a court ruling), the bank amended its deposit agreement to allow customers to opt out of arbitration. In part, the amended arbitration agreement stated:

To reject this arbitration agreement provision, you must send the Bank written notice of your decision … by the later of October 1, 2010 or within forty-five (45) days of the opening of your Account. Such notice must include a statement that you wish to reject the arbitration agreement … along with your name, address, account name, account number and your signature … This is the sole and only method by which you can reject this arbitration agreement provision.

Just after October 1, the bank moved to compel arbitration. The issue of whether the complaint could serve as the formal rejection of the arbitration provision ended up before the Supreme Court of Georgia. That court unanimously held that “the filing of Bickerstaff’s complaint, thereby signaling his rejection of the arbitration agreement, tolled the time in which the putative class members were required to notify SunTrust of their intent to reject arbitration.”

In its analysis, the court leaned heavily on Georgia cases in the class action context, finding that class representatives may satisfy statutory or contractual preconditions on behalf of those class members who remain in the class after it is certified. “[T]he satisfaction of a precondition for suit by the class plaintiff typically avoids the necessity for each class member to satisfy the precondition individually.” Curiously absent from the decision was any discussion of Stolt-Nielsen, or Section 2 of the FAA (requiring strict enforcement of valid arbitration agreements), or the preemption rulings in Concepcion and DirecTV.

[Thanks to a reader for sending me this case before Westlaw did.]

Split South Carolina Court Reasons Its Way Around Rent-A-Center

Our next state court ruling at least acknowledges the relevant federal precedent. In Smith v. D.R. Horton, Inc., 2016 WL 3660720 (S.C. July 6, 2016), the issue was whether a husband and wife had to arbitrate their construction defect claims against their builder. Section 14 of the parties’ agreement was entitled “warranties and dispute resolution,” and made up of ten subparagraphs covering topics from whether the builder could remove existing trees, to the private warranty it provided, to the requirement to arbitrate disputes. The arbitration agreement was in 14(g), with its own subheading “mandatory binding arbitration.” The builder moved to compel arbitration and the homeowners argued that clauses within Section 14 made the arbitration agreement unconscionable.

The builder relied on the severability doctrine, first set forth in Prima Paint but reiterated in Buckeye Check Cashing and Rent-A-Center, which holds that courts may only decide disputes about the validity of the arbitration agreement itself, all other challenges to the contract must be determined by the arbitrator. The builder defined the arbitration agreement as 14(g), which the homeowners did not challenge, while the homeowners defined the arbitration agreement as all of Section 14. The court agreed with the homeowners, relying largely on the title of Section 14, and the fact that the subparagraphs had “cross-references to one another, intertwining the subparagraphs so as to constitute a single provision.”

Having defined the arbitration agreement to include all of Section 14, the court went on to find the arbitration agreement unconscionable due to its disclaiming implied warranty claims and prohibiting monetary damages. (As Section 14 had no severability clause, the court refused to analyze whether the unconscionable portions could be stricken.) Two justices dissented, noting that “the majority has not followed controlling precedent of the United States Supreme Court.” (That should help the cert petition…)

[NOTE TO DRAFTERS: Move your arbitration agreement into a separate paragraph with its own heading right now! Give it its own severability clause. Then you can keep reading.]

North Dakota Forgets To Read The Footnotes

Not to be left out of the “buck SCOTUS” summer trend, North Dakota issued a decision finding that a district court did not err in compelling arbitration of the formation of the parties’ contract. 26th Street Hospitality, LLP v. REAL Builders, Inc., 2016 WL 3022054 (N.D. May 26, 2016). One party to the contract argued the contract was invalid because it was executed without the knowledge and authority of the Partnership, as proper consent had not been received pursuant to the company’s charter documents. Nevertheless, the district court compelled arbitration, without deciding the formation of the contract. The North Dakota Supreme Court unanimously found the district court did not err in refusing to decide formation before ordering arbitration, relying on Rent-A-Center’s discussion of severability.   What it did not discuss, however, is 1) the first footnote in Buckeye Check Cashing which specifically states that the severability doctrine does not apply when the issue is “whether any agreement between the alleged obligor and obligee was ever concluded,” or 2) the fact that a majority of federal courts have concluded formation is an issue for courts, not arbitrators.

As long as we’re talking state courts…

Two state supreme courts have new decisions on waiver. The Texas Supreme Court found a company did not waive its right to arbitrate claims with individual customers in RSL Funding, LLC v. Pippins, 2016 WL 3568134 (Tex. 2016). Importantly, the Texas court said that for Party A to waive its right to arbitrate with Party B, the court will only analyze Party A’s litigation conduct with respect to Party B after a dispute arises. In this case, the majority of the company’s litigation conduct at issue was directed at third parties before a dispute arose with the individual customers.

The Supreme Court of South Carolina found a nursing home waived its right to arbitrate wrongful death claims in Johnson v. Heritage Healthcare of Estill, 2016 WL 3022394 (S.C. May 25, 2016). The nursing home had litigated over the estate’s right to records and conducted discovery before moving to compel arbitration.


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Of all the federal circuit courts, I was not expecting the 7th Circuit to venture out on a limb to support the NLRB’s interpretation of the National Labor Relations Act (NLRA) as precluding class arbitration waivers.  After all, the 7th Circuit gets affirmed more than other circuit courts by SCOTUS, earning it a reputation for being fairly conservative.  Yet, contrary to the five other circuits that have already disagreed with the NLRB interpretation, the 7th Circuit just became the first to step out in support of the Board’s precedent.

In Lewis v. Epic Systems Corp., 2016 WL 3029464 (7th Cir. May 26, 2016), the arbitration agreement between the employer and its employees called for individual arbitration of disputes and waived “the right to participate in or receive money or any other relief from any class, collective, or representative proceeding.”   Nevertheless, a technical writer (of all the unlikely heroes…) sued the employer in federal court asserting violations of labor laws.  When the employer moved to compel individual arbitration, the employee responded that the arbitration agreement violated the NLRA.   The district court agreed with the employee, and the 7th Circuit affirmed.

Knowing that it was creating a circuit split, the unanimous panel supported its result with as much precedent and analysis as it could muster.  The opinion’s logic is this: Section 7 of the NLRA gives employees the right “to engage in other concerted activities,” and filing class actions constitutes “other concerted activities,” by virtue of federal precedent as well as the statute’s legislative history.  Furthermore, the Board’s interpretation of the NLRA is entitled to deference.  Therefore, the Court held, because the employer forced its employees to agree to a contract that stipulated away the employees’ right to class and collective action, it was unenforceable.

The panel then addressed whether the FAA “overrides” the interpretation of the labor laws.  Finding that the two statutes were not in conflict, the panel rejected any notion that the FAA altered the result.  In particular, the opinion notes that on the whole, the NLRA is very pro-arbitration and therefore does not conflict with the federal policy favoring arbitration.  It then attempts to deal with the pro-class-action-waiver language in Concepcion and Italian Colors by pointing out that: 1) it was dicta, dicta, dicta; and 2) the savings clause in Section Two recognizes that arbitration agreements may be made invalid by other laws.

Would this panel have been so bold if there were not an equally divided 8 justices on the Supreme Court?  I don’t know.  But, I do know that if this decision (and the NLRB precedent) wins the day, and if the recent CFPB proposed regulations are issued and upheld, it will represent a fundamental shift in the use and value of arbitration agreements for large companies that contract with hundreds (or thousands or millions) of employees and consumers at once.

Post script: The 7th Circuit did not persuade the 8th Circuit to change its mind on this issue.  Just a week after the Lewis decision, the 8th Circuit decided Cellular Sales of Missouri v. NLRB, 2016 WL 3093363 (8th Cir. June 2, 2016), in which it reaffirmed its 2013 ruling that the NLRB was simply wrong in concluding that class-action waivers violate the labor laws.  However, the 8th Circuit did affirm the Board’s finding that the company violated the NLRA by drafting an arbitration agreement that would lead a reasonable employee to believe it waived or limited their rights to file unfair labor practice charges with the NLRB.


Today the Consumer Financial Protection Bureau proposed the rules that it previewed last fall, following up on its Arbitration Study. Those rules would essentially ban class action waivers from consumer financial agreements, as well as requiring arbitral institutions to provide data on consumer financial disputes to the CFPB.  (As an aside, the proposal is 377 pages long. Are all proposed notices of rulemaking so long??  If so, I am very happy not to practice in administrative law.)

There will be lots of analysis of the rules and their potential impact in the coming days, but for now here are the deets on the proposal, with direct quotes from it where appropriate:

What Do the Proposed Rules Say? Two things.

  •  First, financial consumers will be entitled to participate in class actions in court, even if the governing agreements call for arbitration generally:

 “A provider shall not seek to rely in any way on a pre-dispute arbitration agreement . . . with respect to any aspect of a class action that is related to any of the consumer financial products or services covered by § 1040.3 including to seek a stay or dismissal of particular claims or the entire action, unless and until the presiding court has ruled that the case may not proceed as a class action and, if that ruling may be subject to appellate review on an interlocutory basis, the time to seek such review has elapsed or the review has been resolved.”

The arbitration agreement must clarify:

“We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.”

  • Second, providers of arbitration services must submit redacted copies of the following documents to the CFPB for its continuing monitoring:

“In connection with any claim filed in arbitration by or against the provider concerning any of the consumer financial products or services covered by § 1040.3;

(A) The initial claim and any counterclaim;

(B) The pre-dispute arbitration agreement filed with the arbitrator or arbitration administrator;

(C) The judgment or award, if any, issued by the arbitrator or arbitration administrator”

 CFPB’s Authority:  “In the Dodd-Frank Act, Congress also authorized the Bureau, after completing the [Arbitration] Study (hereinafter Study), to issue regulations restricting or prohibiting the use of arbitration agreements if the Bureau found that such rules would be in the public interest and for the protection of consumers.”   In particular, the Bureau relies on sections 1022(b) and (c), and 1028(b) of the Dodd-Frank Act.

Why CFPB is Proposing the Rule (in its own words):

“The Bureau preliminarily concludes, consistent with the Study and based on its experience and expertise, that: (1) the evidence is inconclusive on whether individual arbitration conducted during the Study period is superior or inferior to individual litigation in terms of remediating consumer harm; (2) individual dispute resolution is insufficient as the sole mechanism available to consumers to enforce contracts and the laws applicable to consumer financial products and services; (3) class actions provide a more effective means of securing relief for large numbers of consumers affected by common legally questionable practices and for changing companies’ potentially harmful behaviors; (4) arbitration agreements block many class action claims that are filed and discourage the filing of others; and (5) public enforcement does not obviate the need for a private class action mechanism.”

Which entities are affected: “[P]roviders of certain consumer financial products and services in the core consumer financial markets of lending money, storing money, and moving or exchanging money.” This includes entities that provide credit to consumers (banks, credit card issuers), extend auto leases, provide debt relief services, collect debts, provide check cashing services, and provide credit reports.

When would the rule take effect?  “Compliance with this part is required for any pre-dispute arbitration agreement entered into after” 211 days after the final rule is published in the federal register.  (So, affected entities likely have about a year to prepare.)

What Other Agencies are Doing on Arbitration:  CFPB spends three pages of its proposal explaining what other agencies have done, or are doing, to protect consumers in the context of arbitration.  The most recent examples are from the Centers for Medicare and Medicaid Services (in the context of long-term health care facilities) and the Department of Education (in the context of college enrollment agreements).

Deadline for comments: The public has 90 days to comment on this proposed rule.

These proposed rules are a continuation of the battle between the executive and judicial branches of the federal government over arbitration.  If passed, they will undoubtedly lead to a significant increase in consumer financial class actions.  It will be interesting to see if they also affect the willingness of companies to include arbitration agreements at all.